European Central Bank raises interest rate for the first time since 2011: “Inflation will remain undesirably high for a while” | Instagram VTM NEWS

The effects of the armed conflict, with inflation at record highs and a lot of uncertainty in the economy, are leading to gloomy prospects for the second half of 2022 and beyond, the French said after the ECB decided to raise interest rates for the first time since 2011 in a attempt to curb rising prices.

Energy prices in particular have risen sharply since the Russian invasion of Ukraine. As a result, the central bank had to intervene. Interest rates may rise even further later this year, but the ECB will not comment on the extent of future interest rate steps in today’s interest rate decision.

When the ECB raises interest rates, banks generally also raise their mortgage rates, for example. Many banks have already done this in recent months, because they foresee that the central bank would take this step. Borrowing is now becoming more expensive, which is expected to result in people and companies spending less money, causing demand in the economy to decrease and prices to rise less rapidly in the long run.

Interest rates had been reduced to historically low levels by the central bank over the years. The ECB did this to boost the eurozone economy. The so-called deposit rate has even been 0.5 percent below zero for a long time. This interest rate now goes to 0 percent. This means that banks no longer have to pay for money that they temporarily store at the ECB.

Critics accuse the ECB that the interest rate hike comes much too late. Inflation in the eurozone has been rising to record highs for months. At the same time, the economic outlook has deteriorated as a result of the war in Ukraine. In this environment, if the ECB raises interest rates too quickly, it could become a burden, especially for the highly indebted countries of Southern Europe.

To ensure that interest rate hikes do not immediately cause problems for some countries, the ECB is launching a new anti-crisis program, the so-called Transmission Protection Instrument (TPI). Through targeted bond purchases, the TPI is intended to prevent “undesirable” market fluctuations in weaker euro countries such as Italy, where interest rates on government debt could rise much faster than in stronger countries. That, in addition to risking a euro crisis, would thwart the goal of price stability across the eurozone.

Lagarde revealed that countries qualify for such purchases if they do enough to put their budgets in order, with the central bank drawing on analyzes from the European Commission and the International Monetary Fund (IMF), for example. At the same time, only the ECB can decide whether to deploy the resource. “We’d rather not use it,” said Lagarde. But she also said that “if we want to, we can go big with it”.

Investors in the foreign exchange markets did not seem impressed by the disclosure. The euro again gave up its previous gains against the dollar. The value of government bonds in Italy, which, in addition to the high government debt, is also in the middle of a political crisis, fell sharply.

Interest rates had not been adjusted since the appointment of ECB President Christine Lagarde in November 2019. The last time interest rates in the eurozone were raised was when Frenchman Jean-Claude Trichet was still the top boss at the ECB. His successor Mario Draghi has only implemented interest rate cuts since the end of 2011.

Also read: Paul D’Hoore explains what the interest rate increase means for you: “Borrowing is becoming more expensive, savings accounts do not immediately give more return” (+)

See also: ECB already announced in June to raise interest rates to combat sky-high inflation